EU RETAIL AND SME PAYMENTS STATE OF THE INDUSTRY

CONTENTS EXECUTIVE SUMMARY

2

PURPOSE OF THIS PAPER

5

OVERVIEW OF THE RETAIL AND SME PAYMENTS MARKET

6

Market structure, key players, and recent trends

7

Payments markets and historical market sizes

18

DISRUPTIVE TRENDS

30

Technology

33

Regulation

44

Supply side

53

Demand side

56

Market size and revenue pool forecasts

59

CONCLUSION

63

EXECUTIVE SUMMARY We are excited to bring you our first flagship European Retail and SME Payments report, covering 28 markets from the United Kingdom and Ireland to Continental Europe and the Nordic and Baltic countries. The payments market is undergoing unprecedented changes, and our report covers a number of trends and detailed analysis of revenue pools. The report investigates all major payments instruments and types, including cards, accountto-account (A2A), cheques, and cash, both for retail (person-to-person (P2P) and person-tobusiness (P2B)), and business (business-to-business (B2B) and business-to-person (B2P)). Remittances, wholesale transfers, transfers among banks, and cross-border payments beyond Europe have been excluded. We have categorised the 28 countries covered across Europe into six payments markets, based on the structure and maturity of the payments infrastructure – for example, United Kingdom and Ireland (UK&I), Central Europe, France and Benelux, Southern Europe, the Nordic states, and other European Union (EU) countries. We believe the European payments market revenue pools currently amount to approximately €38 billion, covering a total of €190 trillion worth of transactions across a number of payments methods (including cash and fee income across all channels). Overall, we expect the market to continue to grow until 2020 at a year-over-year rate of around 7 percent, driven by the growth in overall payments volumes (across both mature and less mature markets), as well as the growth of new types of payments, such as A2A. We forecast very modest reductions in margins on existing payments types, but do expect the substitution of existing revenue streams by new forms of payments, such as the debit equivalent for A2A. Other forecast trends are as follows: •• Growth in acquiring revenues on traditional payment types may have peaked, but this is being offset by the growth in value-added services. Acquirers are also looking to capture newer forms of payments (including growing e-commerce and emerging A2A transactions). •• Growth is expected in account fees (amounting to a 10 percent compound annual growth rate (CAGR) from 2014 to 2020). •• A2A will provide the impetus for additional revenue pools (approximately 6 percent CAGR, 2014-2020), although the associated revenue pool (around €2 billion) is still nascent and represents a fraction of the revenue from cards. •• Cards will continue to grow (8 percent CAGR in debit and 4 percent in credit from 2014 to 2020), although the growth in some markets will be slowed by the adoption of A2A transactions. •• While in certain markets, such as Iberia and Italy, cash use is still expected to remain significant, electronic transactions (cards and A2A) are in the growth mode in the UK and Ireland, and in France and Benelux. Meanwhile, in other markets such as the Nordics, some cash substitution is expected to be taken up by A2A.

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The payments market continues to be dynamic. New technologies, new players (such as third-party payment service providers (TPPs)), a shift in the regulatory landscape, and changes on the supply and demand side are changing market models. We anticipate that: •• Larger players (such as vertically integrated payments companies) participating in all areas will perform well. •• Smaller, niche players will also perform well (such as emerging fintechs and payments companies that focus on P2P/P2B, mainly for on-the-go payments). •• Players with no specific value-added services and low volumes (such as acquiring businesses within banks) face commoditisation, and may struggle. •• There is a greater need for focus. For example, banks where payments serve as a non-core activity may need to decide either to become more committed or pull out altogether. Changes in the future supply side are expected to have an impact on the mix of payments methods, such as in the growth in A2A payments, replacing cash and card transactions. New propositions, including account information service providers (AISPs) and payments initiation service providers (PISPs), would allow for more disruption but also spur innovation. As a result of changes in the regulatory and technology landscape, market participants must consider their business response to the future payments market. We have outlined a health checklist for all player types in the market, enabling them to see if their business is on course to succeed in this ever-changing market. This list includes: •• Clarity on the implications of regulations for your business (most importantly, the payments services directive (PSD2)). •• Participation strategy around A2A – i.e., whether it should be defensive or proactive. •• Avoiding indirect disintermediation, likely to be the result of emerging propositions by established and new players. •• Adapting the business model and building a service subscription type for payments, alongside transaction-driven revenue. Overall, we expect the European retail and small and medium-size enterprise (SME) payments market to remain buoyant and dynamic over the next few years, given the new regulatory changes and uptake of new technology, both by customers and providers.

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4

PURPOSE OF THIS PAPER The payments market is evolving at a rapid pace with the advent of new technologies, consolidation, new and innovative players, radical regulation, and changes in the way customers are using payments – i.e., increasingly as an embedded product. As a result, it is imperative that the various market participants formulate their approaches on a go-to-market strategy, with a full understanding of the optimal business models and the emerging revenue pools. This paper aims to provide the overview of the retail and SME payments market in Europe, including trends and estimates of size, along with the strategic responses for the different players. This report looks at pure payments markets across Europe (i.e., excluding revenue streams, such as lending income on credit cards), in the hope that this makes an interesting and useful read for all audiences – banks, payments providers, technology companies, and new players (including TPPs). This report does not assess the impact of Brexit, as the UK’s access to single market continues to be the subject of discussions and the implications on financial services remain unclear.

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OVERVIEW OF THE RETAIL AND SME PAYMENTS MARKET

6

MARKET STRUCTURE, KEY PLAYERS, AND RECENT TRENDS The European retail payments network is made up of a number of different participants, some of whom are active across different payments methods and different parts of the value chain. The competitive landscape also varies significantly by geography. Consequently, the landscape is complex and highly fragmented.

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To simply this complexity, we divide participants into two broad industry groups for our revenue pool calculations: Account providers: consumer-facing service providers – such as current account providers or credit card providers – with a brand and service offering that is likely to be very familiar to the transacting customer. Acquirer and network providers: merchant-facing service and infrastructure providers. Collectively, these parties provide network services and are responsible for authorising, routing, and processing a particular payment. Parties in this chain include, for example, merchant acquirers, the cards schemes, and processors.

Exhibit 1: High level framework for characterising P2B/P2P payments MARKET STRUCTURE PAYER

NETWORK

RECEIVER

PROCESSING Account provider (PCA)

Issuer

Scheme

Acquirer

Gateway/ PSP/Terminal

Account provider (PCA/BCA)

Payment means

Cash Debit cards Credit cards A2A credit transfers A2A direct debit Cheque

EXAMPLE: EU RETAIL AND SME PAYMENTS (NOT EXHAUSTIVE) Cash

Payment means

Debit cards

Credit cards

Lloyds Banking Group, Sparkasse, HSBC, Nordea, Intesa Sanpaolo, Swedbank, Credit Agricole, Banque Populaire, Barclays, Clydesdale Bank, BBVA, Santander, The Royal Bank of Scotland, Commerzbank

Capital One, JCB, MBNA, Sainsbury’s Bank

Elavon, Global Payments, First Data, Nets, Santander, Worldpay, Intesa Sanpaolo, HSBC, BBVA

Sage Pay, Nets, Verifone, Paypal, Adyen, Ingenico, Worldpay, Ogone

Vocalink, Bacs, Faster Payments, CHAPS

Satispay, Bacs, Faster Payments, Pingit, CHAPS, Trustly, Swish

A2A direct debit

Bacs, Direct Debit, ELV

BACS, Direct Debit, ELV

Cheque

Cheque & Credit Clearing Company, Iberpay, Banque de France

Cheque & Credit Clearing Company, Iberpay, Banque de France

A2A credit transfers

Source Oliver Wyman analysis Note Distributors / ISOs also active in some European markets

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Visa, Mastercard, Carte Bancaire, Diners Club, Amercian Express, Pago Bancomat

Lloyds Banking Group, Sparkasse, HSBC, Nordea, Intesa Sanpaolo, Swedbank, Credit Agricole, Banque Populaire, Barclays, Clydesdale Bank, BBVA, Santander, The Royal Bank of Scotland, Commerzbank

In this part of the report, we summarise the roles, revenue streams, and key trends affecting participants within these two broad industry groups, and calculate historical revenue pools, broken down by geography and category. Exhibit 1 provides an overview of the payment means and services that are included in the scope of this report. It also provides some examples of service providers that operate along the chain.

ACCOUNT PROVIDERS In this report, we consider two types of account provider: 1. Current account providers – personal (PCA) and business (BCA) 2. Credit card issuers This section provides a summary of their role, revenue streams, and the key trends that have impacted their economics.

Current account providers Account economics are driven by net interest income (NII), monthly or annual account maintenance fees, overdraft, and other fees related to credit facilities linked to the account. Exhibit 2 shows a case study of the market average breakdown of BCA revenues across UK providers, and trends from 2011 to 2014.

Exhibit 2: Case study: UK BCA revenue breakdown £ PER ACCOUNT, 2014 Net interest income (NII) 356

192

5

32

331

405

64

25

Other fees1

Interest expense

Interest income

NIM

Total

39%

14%

-18%

-20%

-15%

112 Transaction Overdraft Interchange Monthly charges fees account fees In scope Trend 2011-2014

-19%

-21%

n/a2

23%

1. Includes occasional, account criteria and account mgmt. charges, and other revenue from account holders and other parties 2. Interchange fees 0 in 2011 Source CMA report, Oliver Wyman analysis

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Current account economics are coming under increasing pressure: •• A low interest rate regime in Europe has led to a compression of NIM (net interest margin) on account balances (see Exhibit 3). •• Multilateral interchange fees (MIF) regulation has capped interchange fees for both debit and credit card transactions (see “MIF” for more details). •• In more mature markets, in particular the UK, there is a regulatory drive to make current account pricing structures simpler and more transparent to customers, such as by reducing penalty and other one-off charges. •• New digital banks looking to attract market share by offering account fees at close to free of charge, or offering cards for free. Despite competitive pressure from digital banks, many incumbent banks across Europe have introduced or raised monthly or annual account maintenance fees to cover the shortfall in revenue. PCA providers in most European markets do not charge individuals for transaction activity on their account, choosing instead to absorb the related costs, such as processing fees charged by the networks. Account providers rely instead on other revenue streams to effectively subsidise this transactional activity. Some notable exceptions include: fees for processing cheques in market where cheques are becoming obsolete, such as the Nordics and the Netherlands; and A2A transfers executed on some networks, typically large value payments networks that offer real-time gross settlement (RTGS) in central bank money (such as CHAPS credit transfers in the UK). Charges for ATM cash withdrawals are also levied in some countries, such as Spain.

Exhibit 3: Net interest margin evolution ∆NIM BY COUNTRY %NIM DROP, 2008-2015

HISTORICAL NIM DEVELOPMENT BY COUNTRY %, 2000-2015 8 Spain

6

4

Netherlands

France

Sweden

Greece

Italy

Germany

Germany

2

0

-2

3.8 3.3 1.8

Italy

1.6

Netherlands

1.6

Greece France

2000

2.2

EU

2004

2008

2012

2016

UK

Sweden

EU

UK

1.2 0.4

Source: ECB statistics, Oliver Wyman analysis Note: NIM calculations exclude liquidity buffer charges but include estimates of funding premium. NIM is calculated as Interest income – Interest costs; Interest income for BCAs is proxied by considering 3M EURIBOR or equivalent and five year swap rates.

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Most PCA providers throughout Europe charge customers a modest annual or monthly account maintenance fee. There are exceptions to this rule where most consumers would not expect to pay a monthly charge for a standard current account offering. BCA fees are typically higher, and pricing structures more complicated than PCAs. Transactional activity on these accounts typically incurs a charge. For example, leading BCA providers in Netherlands levy a €0.05- €0.15 fee per transaction for sending some A2A payments. Major banks in most countries offer small businesses the choice of graded tariff structures, where higher monthly fees can be substituted for lower fees per transaction. For example, in the UK, major banks offer their customers a choice between two distinct product propositions: E-payments: for businesses, such as e-commerce companies, which conduct a significant proportion of transactional activity via A2A and other electronic payment. Mix payments: for businesses, such as convenience stores and other small high street merchants, where a large proportion of transactional activity is in cash or cheques. These arrangements are also common in other European Union (EU) markets. Exhibit 4 provides an overview of the BCA and PCA revenue streams that we model in our account provider revenue pools.

Exhibit 4: BCA and PCA revenue streams and scope of our revenue pools REVENUE STREAMS

IN SCOPE OF OUR REVENUE POOLS?

Net interest income (NII) on account balances Fees charged to customers •• Periodic account maintenance fees (annual or monthly) •• Cash management fees (e.g., for depositing cash in BCAs) •• Transaction fees (e.g., for A2A payments, cashing cheques, ATM withdrawal fees) •• Cardholder fees •• Interchange fees •• Charges for unsuccessful transactions (e.g., funds not present) •• Surcharges for transactions executed on alternative channels (e.g., telephone banking) •• Overdraft and other fees related to credit facilities linked to the account •• Extraordinary fees (e.g., for duplicate account statements) and incidents

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Card issuers Most account providers in Europe issue customers with a debit card linked to the account. Credit cards are issued in most EU countries by banks or consumer finance companies. For the purpose of this report, we classify the following card products as credit cards: revolving credit cards and charge or deferred debit cards. Card economics vary significantly across product types and customer segments. However, most issuers receive a combination of interest revenue on outstanding balances, and often charge a variety of fees, which are levied both on a one-off and a per-transaction basis. Cardholder fees vary widely by geography, proposition (for example: standard, gold, or platinum), and product functionality (for example: balance transfer or revolving credit facilities). In the past, interchange rates also varied significantly by EU market, as shown in Exhibit 5. However, MIF regulation introduced by the EU in 2015 has since prompted a reduction and harmonisation of interchange fees across Europe, with debit interchange capped at 20 basis points (bps) and credit at 30 bps. Our account provider revenue pools are calculated by using post-MIF interchange rates. The interchange reduction is accounted for in our 2014 revenue pools.

Exhibit 5: Historical interchange fees on credit card transactions EU INTERCHANGE FEES ON PHYSICAL POS CREDIT CARD TRANSACTIONS BPS 200 Pre-MIF MasterCard no premium

150

Pre-MIF MasterCard premium

100

Pre-MIF Visa no premium Pre-MIF Visa

-60bps premium

50

Pre-MIF average

0

Post-MIF fee

UK

France

Germany

Spain

Source: Federal Reserve Bank of Kansas City report 2013; Oliver Wyman analysis

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Sweden

Netherlands

Greece

Italy

Exhibit 6 provides an overview of the issuer revenue streams we model in our account provider revenue pools.

Exhibit 6: Issuer revenue streams and scope of our revenue pools ISSUER REVENUE STREAMS

IN SCOPE OF OUR REVENUE POOLS?

Annual cardholder fees Interchange fees Other transaction-related fees One-off fees (including balance transfer, late payment fees, paper statement fees, etc.) Interest on outstanding balances

ACQUIRER AND NETWORK PROVIDERS In this report we consider three types of networks: •• Cards •• ATM •• Account to account (A2A) Within the acquirer and network provider revenue pools, we capture a number of players responsible for providing services and the underlying infrastructure to facilitate these payments. This section gives a summary of their role, revenue streams, and the key recent trends that have impacted their business models.

Cards value chain The cards value chain provides the underlying infrastructure and services that enable cards transactions to be captured, authorised, processed, and settled. This value chain is typically divided between multiple participants who perform different roles. Exhibit 7 provides an overview of this value chain and the key participants. The primary sources of revenue for cards schemes are membership fees and volume-based scheme fees that are charged to both issuers and acquirers. Reimbursements and rebates are often extended to the larger issuers or acquirers in order to attract volume to the schemes.

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Exhibit 7: Cards network – overview of key participants DESCRIPTION

REVENUE STREAMS

Acceptance providers Handepay

• Recruit merchants to accept card payments

• Transaction fee • Gateway fee • Terminal rental

Gateway/Payment Service Provider (PSP) Worldpay, Adyen

• Provide merchant software for transaction capture and routing • Transmit transaction data to the acquirer

• Transaction fee • Gateway fee • Terminal rental

Acquirer1 Elavon, Intesa Sanpaolo

• Provide platform to connect merchants to scheme networks and process payments • Responsible for collection of transaction information and settlement • Authorise transactions • Hold deposit accounts for merchants • Underwrite card transaction and hold liability for merchants

• Merchant Service Charge

Processing

Card scheme2 Visa, Mastercard

• Provide network for transaction routing • Connect and switch transactions between merchant acquirers and card issuers • Invest in marketing card acceptance and their own brand • Determine rules and fees

• Scheme fees

Issuing services

Issuing bank3 MBNA, Credit Agricole

• Hold contractual agreement with cardholder • Bear credit risk • Able to outsource everything except balance sheet activities

• Interest income on balances • Interchange • Other fees and commissions

Merchant Amazon, Galeria Kaufhof Acquiring services

1. Acquiring processor if outsourced 2. Scheme processor if outsourced 3. Issuing processor if outsourced Note: Acceptance providers are active in some EU markets Source: Oliver Wyman analysis

EU acquiring remains a largely domestic business with different providers operating in each country. The acquirer’s principle source of revenue is the merchant service charge (MSC). This charge includes an interchange fee, which is passed on by the acquirer to the issuer. Despite the alignment of interchange rates, MSCs vary significantly across Europe, reflecting the competitive dynamics in each market and the bargaining power of local merchants. The dynamics of the acquiring market vary significantly between the more price-sensitive large corporate segment and the SME merchant segment: •• The bargaining power of large corporates has driven down the MSC, resulting in low margins for acquirers. •• Acquirers seek to counter by promoting and charging large corporates for valueadded services (such as reporting, integrated payment solutions, and customerfacing solutions). •• Acquirers use the large corporate segment primarily to achieve scale and reduce marginal costs. •• Profits are derived from the SME segment, where MSCs are higher and afford a higher margin. Acquirers also charge gateway and terminal fees in this segment. 14

CARDS NETWORK PARTICIPANTS AND REVENUE MODELS The diagram below shows a schematic of the participants in a cards network, and an indication of the fees exchanged between these parties. The commercial arrangement between these parties is not very transparent, and varies significantly by geography. As such, we calculate a single aggregate revenue pool for acquirers and network providers. We model MSCs (net of interchange) adjusted to account for value-added services and point-of-sale (PoS) terminal fees, and include these in our acquirer and network provider revenue pools.

Scheme Fee 15 bps

Scheme Fee 18 bps Card network/scheme Net: 22 bps

Rebate to major issuers 8 bps

PROCESSING MAY BE OUTSOURCED Rebate 3 bps

Card issuer Net: 51 bps Interchange Fee 58 bps New regulation caps interchange fees at 0.2% for debit card and 0.3% for credit card

Merchant acquirer Net: 44 bps

Merchant Services Charge 125 bps

Customer makes payment Customer

Processor Fee 8 bps

Acquiring processor Net: 8 bps

Merchant

1 Card issuer

51 bps

2 Card network/ scheme

22 bps

3 Merchant acquirer and processor

52 bps

4 Total merchant fee

125 bps

Source: JPM estimates, Oliver Wyman analysis

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A2A networks An A2A network is an interbank network that facilitates account-to-account transactions. There are two broad categories of A2A payment: direct debit and credit transfers extending now to the SCT Inst scheme for instant payments. Some networks support close to real-time authorisation and settlement. Transactions on other networks are settled overnight, and may take a few working days to clear. Banks are required to establish a separate body to manage the network and process transactions. Their role often encompasses setting standards and processes across the industry, and using their economies of scale to provide a common infrastructure for authorisation, clearing, and settlement. Many of these networks are still owned by consortia of major banks in each European market, and operate on a not-for-profit basis (such as Faster Payments (provided by VocaLink, itself acquired by MasterCard), CHAPs, and BACS in the UK). Fees are often levied on a per-transaction basis in order to recover operational costs. We include these fees within our acquirer and network provider revenue pools. In EU countries where these fees are not passed on to the customer, they are subtracted from our account provider revenue pools.

ATM networks ATM networks provide the physical ATM terminal infrastructure and processing that enable cardholders to make cash withdrawals. Networks are either bank-owned or independent. A distinction is drawn between “on‑us” transactions (i.e., when the terminal owner and issuer are the same entity) and “offus”. Off‑us transactions are either made on a network owned by another bank, or by an independent ATM deployer (IAD) or independent service operator (ISO), who manage independent terminal networks. Some interbank schemes have been established to extend the reach of the on-us network. For example, in Sweden, a consortium of the major banks have established a separate company, called Bankomat, to manage the ATM network. The UK network is owned by the banks, but governed by a scheme administered by Link. On-us transactions across Europe are typically free for the customer, while off-us transactions incur terminal fees, ATM interchange, and/or fees from the issuer, depending on their ownership model. We include terminal fees only in our acquirer and network provider revenue pools. ATM interchange is assumed to net to zero at the system level, and so does not appear in our account provider pools.

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PAYMENTS MARKETS AND HISTORICAL MARKET SIZES PAYMENTS MARKETS In spite of recent initiatives to harmonise the payments infrastructure and regulatory regime across Europe (such as SEPA and PSD1), the landscape remains complex and heterogeneous. In order to rationalise and navigate this complexity, we have grouped the 28 EU member countries into six payments markets after considering the following factors: 1. Geographical proximity 2. Structure and maturity of the branch and electronic payments infrastructure (i.e., credit cards, debit cards, A2A) 3. Historical adoption rates and usage patterns associated with different payments means (e.g., prevalence of cash or other paper-based payments, the penetration of debit and credit cards, preferred e-commerce payment solution) An output of this assessment and overview of the six payment areas can be seen in Exhibit 8. We also provide a more detailed cross-comparison in “Historical trends and comparison of EU markets” and identify noteworthy differences in the market structure or usage of different payment means in key geographies.

Usage

Infrastructure

Exhibit 8: Overview of EU payments markets

UK & IRELAND

FRANCE & BENELUX

CENTRAL EUROPE

IBERIA & ITALY

NORDICS

OTHER EU1

GDP per capita €’000 pp

54

34

28

23

61

10

Branch density

Low

Medium

Low

High

Low

Medium

ATM network density High

High

Medium

Medium

Low

Medium

PoS penetration

Medium

Medium

Low

Medium

High

Low

Card penetration

High

Medium

Medium

Medium

High

Low

Cash & cheque use

Medium

High

Medium

High

Low

High

Card use

High

High

Low

Low

High

Low

A2A use

Medium

Medium

High

Medium

Medium

Medium

MATURITY

HIGH/MEDIUM

MEDIUM

HIGH/MEDIUM

MEDIUM/LOW

HIGH

LOW

1. Baltics, South East Europe, South Central Europe Source: ECB Payments Statistics (2014), Oxford Economics 2014 data, Worldpay report Nov 2015, Oliver Wyman analysis

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HISTORICAL TRENDS AND COMPARISON OF EU MARKETS Payment volumes in Europe have grown steadily in recent years, in line with GDP. In 2014, there were approximately 113 billion noncash payments transactions in Europe, the most frequent noncash transaction being debit card spending at PoS. Noncash payment activity is at its highest, and growing at the greatest rate, in the Nordics, France and Benelux, and the UK and Ireland. These markets have more mature cards networks and higher penetration rates for cards. A2A-based electronic payment solutions have also been successfully deployed in these geographies. Exhibit 9 shows historical payments activity in Europe by payment means and payments market.

Cash, cheques, and supporting infrastructure Cash remains a popular payment mechanism across the majority of the EU. The value of cash withdrawn from ATMs is highest in Central Europe, but is still significant in Iberia and Italy, in the UK and Ireland, and in France and Benelux, indicating that many European economies still rely to a considerable extent on cash payments. Cash withdrawal behaviour at ATMs varies significantly across the different EU payment markets, as shown in Exhibit 10. This is a result of the differences in ATM network densities and the economic models of ATM network providers. A comparison of ATM network densities can be found in Exhibit 11.

Exhibit 9: Overview of historical payments activity across EU markets NUMBER OF TRANSACTIONS BY PAYMENTS MEANS (EXCL. CASH) €TN 2010-2014 #BN 120 18 113

90

93

96

102

NUMBER OF TRANSACTIONS PER CAPITA BY PAYMENTS MARKETS (EXCL. CASH) 2010-2014 # per capita 450 GDP nominal GDP nominal, total EU

Nordics

UK and Ireland

80

12

ACH (credit transfers)

France and Benelux1

300

ACH (direct debits) ATM withdrawals 40

6

Central Europe 150

Cheques

Iberia and Italy Other EU

PoS credit cards 0

0 2010

2011

2012 2013

PoS debit cards

2014

0 2010

2011

2012

2013

2014

1. Figures do not include cards transacton data for France until 2014 due to data limitations of ECB Payments Statistics data set Source: ECB Payment Statistics, Euromonitor, Oliver Wyman analysis

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The UK and Ireland have high withdrawal rates and low average withdrawal values. The majority of the ATM network is operated under the LINK scheme and is free at the point of use. Similar interbank ATM schemes have been established in other markets. In Sweden, the Bancomat ATM network is jointly owned by five major banks; no fee is charged to the customer for the use of the shared ATM network. More complex structures have evolved in other EU payments markets, where customers are more likely to be charged for making withdrawals. As a consequence, the average amount withdrawn is often higher in these markets. In Spain, for example, the major banks have formed three ATM networks: 4B, ServiRed, and 6000. Customers using an ATM on their bank’s own network are in some cases charged a modest withdrawal fee of between €0.50 and €1.80, with higher fees for withdrawals made on different networks. Cheques, generally, are in relative decline throughout the EU. However, they remain a popular payment mechanism in some EU markets. We observe the following trends: •• Cheque usage is high in South Eastern Europe, particularly Greece and Cyprus where they accounted for more than 20 percent of noncash payments by value. •• In Spain and Italy, cheques are still routinely used for large-value payments, such as house purchases. •• In more mature markets, such as the UK and France, there have been concerted efforts1 by industry and government to phase out and substitute cheques with more modern electronic payment mechanisms, such as A2A transfers. These efforts have achieved varying degrees of success.

Exhibit 10: Cash withdrawals at ATMs VALUE PER HEAD BY PAYMENT MARKET €K, 2014

3.7 3.4 2.7 2.5 2.1 1.8

UK & Ireland

Central Europe

Iberia & Italy

France & Benelux

Nordics

Other EU

139

98

105

132

AVERAGE VALUE OF CASH WITHDRAWALS €, 2014 85

127

Source: ECB Payment Statistics, Euromonitor, Oliver Wyman analysis 1 For example, in 2008 the UK Payments Council considered the possible closure of cheque clearing by 2018. However, the initiative was abandoned. Nonetheless, cheque usage continues to decline gradually as consumers switch to faster and more convenient A2A based payment methods (e.g., UK FPS). In 2012, the French Ministry of Finance announced an objective to halve the number of cheques issued in France within five years. Development of alternatives to cheque payments remained one of the aims of the national strategy in 2015. And while it is in overall decline, cheque usage remains high in France relative to comparable EU markets.

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•• The cheque payment mechanism is becoming obsolete in several other European countries, such as the Netherlands, Sweden, and Estonia, due to low rates of merchant acceptance and high cheque-cashing fees by account providers. Branch network density varies across Europe, as follows: •• The highest density of branches per capita is in Iberia and Italy, where there is a greater dependency on cash and paper-based payment means. •• The lowest density can be found in the UK and Ireland, Central Europe, and the Nordics. Banks in these markets have been able to reduce their branch footprint, in part due to the relatively high penetration of cards and other electronic payments mechanisms. Cash and cheque use in the EU is under threat with the growing penetration of cards and other more innovative payment means. Authorities in some EU payments markets are also introducing policy measures to encourage the migration to a cashless society. In 2012, for example, the Spanish government enforced a law to impose a limit of €2,500 for cash transactions in order to clamp down on “grey” market activity and combat tax evasion.

Cards markets The dynamics and maturity of the cards markets differ across Europe. This variation is principally caused by two factors: Maturity of the underlying infrastructure: the key differences being PoS terminal penetration rates and the technologies available at PoS (e.g., chip and PIN, contactless, magnetic stripe, and signature). Card penetration rates: these vary from an average of 0.5 cards per head to 2.5 cards per head. There are also different preferences. Debit cards are more popular in some markets, and credit cards are more so in others. Exhibit 12 provides an overview of how these factors compare across EU payments markets, and juxtaposes these factors with indicators of card usage. Our main observations on the relevant markets are as follows: •• Card penetration is highest in the UK and Ireland and in the Nordics. Issuers in these markets also achieve the highest total transaction value per card, although the causes are different: high average transaction value (ATV) in the UK and Ireland, as opposed to high frequency and low ATV in the Nordics. •• France and Benelux and Central Europe have comparable penetration rates. However, the PoS network density is greater in France and Benelux, presenting consumers with much greater opportunity to use their cards. As a consequence, France and Benelux has a greater frequency of transactions and a lower ATV.

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Exhibit 11: ATM and branch network densities by payment market BRANCH DENSITY BRANCHES PER 1,000 INHABITANTS, 2014

ATM NETWORK DENSITY ATMs PER 10,000 INHABITANTS, 2014

Nordics

UK and Ireland

Nordics

UK and Ireland

Central Europe

Central Europe >9

>38 France and Benelux

>28

France and Benelux

>6

Other EU1

Other EU1